Treasuries rallied the most this year after Standard & Poor’s cut Greece’s credit ratings to junk, bolstering demand for the safest government securities.
Two-year note yields fell to the lowest level since March 18 even as the Treasury sold a record-tying $44 billion of the securities. Ten-year note yields dropped to the least since March 23, while 30-year yields touched the lowest since March 18 after the downgrade by S&P, which also reduced Portugal’s credit rating and assigned a negative outlook on the nations’ debt.
“It’s a classic flight-to-safety trade,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo & Co. in Milwaukee. “Things are less attractive at auction than they were, but there is increasing concern that things are getting harder to keep together in the euro zone, and there is concern for spillover, so it’s all Europe right now.”
The yield on the benchmark 10-year note declined 11 basis points to 3.69 percent at 4:54 p.m. in New York, according to BGCantor Market Data. The yield dropped as much as 14 basis points, the most since Oct. 1, 2009. The price of the 3.625 percent security maturing February 2020 rose 29/32 or $9.06 per $1,000 face value, to 99 14/32.
Two-year note yields fell as much as 12 basis points to 0.93 percent, before trading at 0.95 percent. The drop was the biggest since Nov. 27, when Dubai’s proposal to delay debt payments sparked a global slide in stocks and higher-yielding assets. Thirty-year bond yields declined 9 basis points to 4.58 percent, after slumping as much as 12 basis points, the biggest intraday decline since Sept. 10.
Record Note Sale
The two-year notes sold today that settle on April 30 drew a yield of 1.024 percent, compared with the average forecast of 1.022 percent in a Bloomberg News survey of eight of the Federal Reserve’s 18 primary dealers. Today’s sale is the seventh straight monthly offering of $44 billion.
Investors bid for 3.03 times the amount offered, compared with 3 times last month and an average of 3.10 for the past 10 sales.
S&P forecast investors would be paid no more than half their initial outlay in the event of any restructuring of Greek debt when it lowered the long- and short-term sovereign credit ratings on Greece to BB+ and B, respectively, from BBB+ and A-2. The outlook is negative.
Portugal’s long-term local and foreign currency sovereign issuer credit ratings were reduced to A- from A+ by S&P because of fiscal and economic structural weaknesses. The rating company said the rating could be reduced further should financial consolidation fall short of expectations.
Portugal and Spain
“The focus today started to move to some of the peripherals, Portugal and Spain,” said Richard Bryant, senior vice president in fixed income at MF Global Holdings Ltd. in New York, a broker of exchange-traded futures. “A lot of the rally took place subsequent to the Portugal downgrade, so clearly the market views that as significant.”
The euro dropped below $1.32 for the first time since April 2009 and has weakened 2.5 percent this month against the dollar on concern the European Union-led 45 billion euro ($59.3 billion) aid package isn’t a done deal as Germany looks for further austerity measures from the Greek government.
Greek Prime Minister George Papandreou was last week forced to activate the package of emergency loans from the euro region and the International Monetary Fund, after the country’s soaring borrowing costs made it difficult to finance its debt in the markets.
Federal Reserve Chairman Ben S. Bernanke said a failure to reduce the federal budget deficit may push up interest rates higher over time and impair economic growth, putting the recovery at risk.
“Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high,” Bernanke said in a speech today to a White House commission on the budget deficit. “Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth -- and might even put the current economic recovery at risk.”
The central bank’s policy setting Federal Open Market Committee ends a two-day meeting when it announces its next decision on interest-rates tomorrow.
Today’s two-year note sale was the second of four auctions this week totaling a record $129 billion. The U.S. sold $11 billion of five-year inflation-protected notes yesterday and is scheduled to auction $42 billion of five-year securities tomorrow and $32 billion in seven-year debt the following day.
‘No Man’s Land’
“We are sort of in no man’s land at this point with the auctions, the FOMC meeting and a rash of economic data coming,” said David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont, which manages $22 billion. “The market may be a ahead of itself with the recent rally.”
Indirect bidders, the category of investors that includes foreign central banks, purchased 31 percent of the notes, versus the 10-sale average of 45.2 percent.
Futures on the CME Group Inc. exchange showed a 58 percent chance the Fed will raise its target rate by at least a quarter point by year-end, compared with 65 percent a week ago.
To contact the reporter on this story: Daniel Kruger in New York at firstname.lastname@example.org